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UPDATE 2-UK engineer GKN sees challenging 2003

(Adds comments by finance director and analysts, share price)

By Santosh Menon

LONDON, Nov 25 (Reuters) - Shares in British automotive and aerospace engineering firm GKN Plc fell more than five percent on Monday after the company said uncertain markets would make 2003 a challenging year.

GKN shares were down 4.66 percent, or 10-1/2 pence, at 215p by 1220 GMT, off lows of 211-1/2p. The London market's blue-chip index fell 0.7 percent.

The firm, which generates around 70 percent of its turnover from selling parts to car makers, said in a trading update its forecasts for 2003 were based on assumptions the U.S. automotive market would weaken and European markets remain subdued.

Finance Director Nigel Stein told Reuters that the company was assuming a five-percent fall in North America and expected the European business to be flat.

"Our view is driven by what we feel about the industry and perhaps a slightly cautious stance we tend to take," he said.

Last week, another British supplier of car parts, Tomkins Plc , said U.S. output of new cars and light trucks was widely forecast to soften next year to about 15.5 million to 16 million, from an expected 16.4 million in 2002.

But GKN's outlook for its growing aerospace division was slightly better. The firm said it expected the military side of the business to remain strong, while ruling out any improvement in the civil aviation segment.

"It's (the civil aerospace business) already 30 percent down. We expect it will stay there," Stein said.

"In these market conditions and with reduced programme activity levels in (helicopter maker) AgustaWestland and the previously advised increases in pension and interest costs, 2003 is expected to be a challenging year," the firm added.

AgustaWestland, the world's second biggest helicopter maker, is GKN's joint venture with Italy's Finmeccanica SpA .

FIGHTER CONTRACT

The firm recently won a contract to develop components for the F135 engine on the new U.S. F-35 Joint Strike Fighter, but Stein said revenues from the project would start only from 2006.

Analysts said GKN's trading update offered few surprises.

"It's absolutely bang in line. No surprises at all," said Williams de Broe analyst Harry Philips, noting that the shares had fallen because the statement lacked any positive surprises.

"We continue to be a buyer at this level," Philips said.

Tessa Starmer, analyst at Charles Stanley, said the tough outlook for the automotive and civil aerospace businesses through to 2003 was expected, but expressed relief the company's 2002 results were on track.

GKN reiterated its statement of last August, when it said it expected the second half of 2002 to be better than the year-earlier period. It also said on Monday it expected the outcome for the year to be in line with market expectations.

"After the first 10 months of 2002, year-to-date unaudited group profits before tax, goodwill amortisation and exceptional costs are now close to those for the same period last year," it said.

Analysts are forecasting GKN's 2002 pre-tax profit at 229 million pounds ($359 million), according to a Multex.com survey.

GKN shares had underperformed the FTSE 100 index by some eight percent in the 12 months to Friday's close.